Prescription drug spending has been the fastest growing health expenditure, currently on the order of 20% per year. This trend coincides with the dramatic growth of drug advertising aimed directly at the consumers through television and other media, particularly since the August 1997 Food and Drug Administration decision to ease advertising restrictions. This raises the possibility that direct-to- consumer advertising contributes to increased utilization of prescription drugs and frustrates efforts by payers to control health care costs. The primary aim of the proposed study is to address the effects of direct-to-consumer advertising on prescription drug choice. Specifically, it addresses two questions: (1) To what extent does direct-to-consumer advertising increase the utilization of advertised drugs? (2) Does direct-to-consumer advertising undermine the insurers' efforts to induce price sensitivity in prescription behavior? This study provides a conceptual framework to analyze the demand for prescription drugs and physician prescription decision-making, with special attention to the influences of direct-to-consumer advertising, formularies, and cost-sharing requirements. The econometric analysis utilizes an extensive panel of prescription claims matched with direct-to-consumer and physician advertising expenditures. The estimation utilizes a random coefficients multinomial logit procedure to account for heterogeneity of patient and physician tastes and preferences. Understanding the mechanisms behind the growth of prescription expenditures and the possible ways of controlling that growth is important to all third-party payers that struggle with controlling their pharmacy costs. This research also has potential implications for the regulation of drug advertising and, if a Medicare drug benefit becomes reality, may aid in structuring such a benefit.